Fairfax 2025

[MMM20]

On 2/14/2025 at 6:52 PM, SafetyinNumbers said:

I like that we dig into all of the details and question every decision. But I wonder if FFH shareholders are more critical of its management team than BRK and MKL shareholders are of their respective management teams. If so, does it hurt the multiple?

Sure, but isn’t that why many of us are here in the first place? I think this is the anatomy of a true “long term compounder” - that it persistently trades at a discount to a growing intrinsic value for one reason or another. In this case, it’s arguably about fixation on some past bets that didn’t work out, missing the forest for the trees. But if that’s why the opportunity exists, then I’m glad for it.
 

Eventually they’ll stop sharing details of every single line item like BRK has. Maybe we’re seeing the beginning of that with the new format of the earnings calls. 
 

Edited Sunday at 01:31 PM by MMM20

[petec]

On 2/14/2025 at 6:31 PM, Munger_Disciple said:

None of the share buybacks that go into treasury will be beneficial to outside shareholders

 

I have to disagree. 

 

Are salaries and bonuses "beneficial to outside shareholders"? Of course - the company would collapse without them.

 

So surely paying some of that compensation in the form of shares that have been bought in the market is even better, since it aligns employees perfectly with shareholders? (NB options don't do this since there is no downside risk.)

 

I hope there is a decent lockup. I do know Fairfax's stock compensation schemes have very long vesting periods.

 

[petec]

22 hours ago, Maverick47 said:

So maybe what we’re seeing is that the company has taken advantage of years of below book value market prices to build roughly a 10 year stockpile of Treasury shares to be used for future stock based incentive grants.

 

I think this is exactly right and it has been going on for years. If anyone thinks total compensation is excessive at Fairfax I think they need to make a clear argument for that based on market rates for the relevant employees. But in the absence of that we should give full credit for

1. A comp structure (buying shares at market and giving them to employees) that aligns employees to shareholders better than most others, especially if there are long lockups or vesting periods, which I am pretty sure there are.
2. Extremely smart capital allocation, building a war chest of treasury stock at cheap prices to fund years of employee comp.

 

[Xerxes]

Barrick Gold talked about the need to redomicile to U.S. probably accelerated under Trump. 
 

There was no mention of this on conference call, and we know it is “been there done that” for FFH, but do folks here see a risk that the operation business environment would become such that FFH would need to redomcile out of necessity, for tax or other reasons.

 

 

[This2ShallPass]

6 hours ago, SafetyinNumbers said:

The compensation expense is based on when the shares are awarded but it hits the income statement as the vest. I think the accounting is correct to exclude the shares from the BVPS calculation but to keep them in the diluted EPS calculation as they are promised to employees much like with in-the-money stock options.

Yes it'll hit income statement on vest.

 

When Fairfax decides to deploy this, I think they will retire the treasury stock as the employee stock vests. In that case it shouldn't impact diluted shares as they cancel out. Irrespective, treasury stock is something the company has purchased and how can that impact diluted share count which is equivalent of stock issuance? 

 

[SafetyinNumbers]

2 hours ago, Xerxes said:

Barrick Gold talked about the need to redomicile to U.S. probably accelerated under Trump. 
 

There was no mention of this on conference call, and we know it is “been there done that” for FFH, but do folks here see a risk that the operation business environment would become such that FFH would need to redomcile out of necessity, for tax or other reasons.

 

 

Barrick just wants the ETF demand for its shares. FFH wouldn’t do that. If Barrick does leave, it does open a spot in the 60, which could benefit FFH’s multiple.

[SafetyinNumbers]

1 minute ago, This2ShallPass said:

Yes it'll hit income statement on vest.

 

When Fairfax decides to deploy this, I think they will retire the treasury stock as the employee stock vests. In that case it shouldn't impact diluted shares as they cancel out. Irrespective, treasury stock is something the company has purchased and how can that impact diluted share count which is equivalent of stock issuance? 

 

When it vests, the stock is issued out of treasury stock isn’t it? Is that what you mean by retire?

[This2ShallPass]

1 minute ago, SafetyinNumbers said:

When it vests, the stock is issued out of treasury stock isn’t it? Is that what you mean by retire?

Yes. Looks like employee stock can be issued from treasury stock directly, I thought it'll be an issuance from regular stock and then retiring equivalent number of treasury stock (practically the same thing).

 

"Yes, a company can issue employee stock options from treasury stock, meaning when an employee exercises their option, the shares they receive will come from the company's repurchased shares held as treasury stock; essentially, the company will "re-issue" those shares to the employee instead of issuing new ones."

 

[Munger_Disciple]

4 hours ago, petec said:

 

I have to disagree. 

 

Are salaries and bonuses "beneficial to outside shareholders"? Of course - the company would collapse without them.

 

So surely paying some of that compensation in the form of shares that have been bought in the market is even better, since it aligns employees perfectly with shareholders? (NB options don't do this since there is no downside risk.)

 

I hope there is a decent lockup. I do know Fairfax's stock compensation schemes have very long vesting periods.

 

 

The reality of SBC plans is a lot more nuanced than you seem to imply. There are abused way too often by management (used to be just tech guys, now it is more wide spread) to the detriment of shareholders. That may or may not be the case at FFH, but minority shareholders should always be on the lookout. 

 

IMO the best comp plans are those at Berkshire, i.e., all cash based and no SBC at all. Ajit, Greg and other managers buy the stock just like us with their own money, as do the board members. Real skin in the game and complete alignment with shareholders.

If the SBC at FFH is just matching 10% of employee comp with stock, and they are buying back stock in the market to satisfy the SBC, I am ok with it especially if it has a long enough vesting period. I would like to see the details of the plan though. 

 

When you are a minority shareholder, it pays to be skeptical rather than assume everything is wonderful IMO. 

[SafetyinNumbers]

14 minutes ago, Munger_Disciple said:

 

The reality of SBC plans is a lot more nuanced than you seem to imply. There are abused way too often by management (used to be just tech guys, now it is more wide spread) to the detriment of shareholders. That may or may not be the case at FFH, but minority shareholders should always be on the lookout. 

 

IMO the best comp plans are those at Berkshire, i.e., all cash based and no SBC at all. Ajit, Greg and other managers buy the stock just like us with their own money, as do the board members. Real skin in the game and complete alignment with shareholders.

If the SBC at FFH is just matching 10% of employee comp with stock, and they are buying back stock in the market to satisfy the SBC, I am ok with it especially if it has a long enough vesting period. I would like to see the details of the plan though. 

 

When you are a minority shareholder, it pays to be skeptical rather than assume everything is wonderful IMO. 

A nice thing about Fairfax is that Prem doesn’t take any SBC and only pays himself $600k (that agreement might expire this year) so he isn’t benefiting from salary inflation that most firms suffer from. That being said, the SBC is a huge perk because it makes the compounding even more impactful and thankfully it comes with shareholder alignment.

[Munger_Disciple]

15 minutes ago, SafetyinNumbers said:

A nice thing about Fairfax is that Prem doesn’t take any SBC and only pays himself $600k (that agreement might expire this year) so he isn’t benefiting from salary inflation that most firms suffer from. 

 

 

 

This is one of the big things at FFH that clinched it for me when I finally pulled the trigger ~ three years ago (after sucking my thumb for far too long) and bought a significant stake (for me) of FFH. As the old German saying goes: Man is too soon old, and too late smart!  But then it is better to be late to the party than never .

Edited Sunday at 07:40 PM by Munger_Disciple

[SafetyinNumbers]

7 minutes ago, Munger_Disciple said:

 

 

 

This is one of the big things at FFH that clinched it for me when I finally pulled the trigger a couple of years ago (after sucking my thumb for far too long) and bought a significant stake (for me) of FFH. As the old German saying goes: Man is too soon old, and too late smart!  But then it is better to be late to the party than never .

One would think this fact alone would lead to the shares trading at a premium. The guy in control makes all his money from his own capital allocation decisions. True skin in the game. Berkshire seems to benefit from this trait. In the scheme of things $600k vs $1 isn’t much different when the net worth is measured in billions. 

[Munger_Disciple]

3 minutes ago, SafetyinNumbers said:

One would think this fact alone would lead to the shares trading at a premium. The guy in control makes all his money from his own capital allocation decisions. True skin in the game. Berkshire seems to benefit from this trait. In the scheme of things $600k vs $1 isn’t much different when the net worth is measured in billions. 

 

One big difference between FFH & BRK is that BRK has no SBC for anyone, not just for Warren. But Prem basically takes almost zero salary just like Warren. 

[gfp]

But does Prem reimburse the company for half his salary for personal use of postage stamps every year?  If not it's a deal breaker for me.  Raised the dividend... greedy!

[Munger_Disciple]

1 minute ago, gfp said:

But does Prem reimburse the company for half his salary for personal use of postage stamps every year?  If not it's a deal breaker for me.  Raised the dividend... greedy!

 

 

As a US shareholder, I don't like the dividend to be honest (with all the BS Canadian tax withholding & all). I would rather they retain 100% of earnings like BRK & press the gas pedal on compounding (i.e., create > $1 mkt value for each $1 retained). 

[SafetyinNumbers]

11 minutes ago, Munger_Disciple said:

 

One big difference between FFH & BRK is that BRK has no SBC for anyone, not just for Warren. But Prem basically takes almost zero salary just like Warren. 

I think it’s arguable Fairfax has a better culture and the SBC might be a big part of that.

[SafetyinNumbers]

5 minutes ago, Munger_Disciple said:

 

 

As a US shareholder, I don't like the dividend to be honest (with all the BS Canadian tax withholding & all). I would rather they retain 100% of earnings like BRK & press the gas pedal on compounding (i.e., create > $1 mkt value for each $1 retained). 

I assume the dividend is so Prem and the employees can afford to do some good works with their wealth while they are still alive! Also, it’s probably better for people to not get used to selling if they are going to enjoy the whole ride.

[Viking]

1 hour ago, SafetyinNumbers said:

A nice thing about Fairfax is that Prem doesn’t take any SBC and only pays himself $600k (that agreement might expire this year) so he isn’t benefiting from salary inflation that most firms suffer from. That being said, the SBC is a huge perk because it makes the compounding even more impactful and thankfully it comes with shareholder alignment.

 

Prem's salary has been a massive long term win for Fairfax shareholders. C$600,000 per year is nuts. I think Gaynor's total pay at Markel is something like $8 million per year. Money aside, look at what they are respectively delivering in terms of performance. The value creation for Fairfax shareholders over the decades of Prem's rock bottom salary has been meaningful (looking at the power of compounding in a slightly different way).

 

[gfp]

Ajit and Greg cost $40 million a year between them.  5 years costs $200 million.  Yikes

[keegomaster]

45 minutes ago, gfp said:

Ajit and Greg cost $40 million a year between them.  5 years costs $200 million.  Yikes

Buffet said that Ajit had created tens of billions of value for Berkshire... 20m in compensation is peanuts

[Munger_Disciple]

1 hour ago, keegomaster said:

Buffet said that Ajit had created tens of billions of value for Berkshire... 20m in compensation is peanuts

 

Knowing @gfp's sense of humor, he was just kidding. 

[Mystery Guest]

9 hours ago, SafetyinNumbers said:

I assume the dividend is so Prem and the employees can afford to do some good works with their wealth while they are still alive! Also, it’s probably better for people to not get used to selling if they are going to enjoy the whole ride.

As a Canadian there are also tax advantages to a dividend as it makes interest on funds borrowed to purchase shares of a dividend paying Canadian corporation tax deductible.  It also makes it shareholders take a longer term perspective as they do not have to sell a portion of their holdings to fund their living expenses.... I used to look at it your way, but i believe there is wisdom behind the dividend.  

[petec]

13 hours ago, Munger_Disciple said:

The reality of SBC plans is a lot more nuanced than you seem to imply. There are abused way too often by management (used to be just tech guys, now it is more wide spread) to the detriment of shareholders. That may or may not be the case at FFH, but minority shareholders should always be on the lookout. 

Agree 100%.

 

13 hours ago, Munger_Disciple said:

IMO the best comp plans are those at Berkshire, i.e., all cash based and no SBC at all. Ajit, Greg and other managers buy the stock just like us with their own money, as do the board members. Real skin in the game and complete alignment with shareholders.

 

I like BRK's method, but it is not the only way. I have no issue with FFH creating long vesting plans to issue treasury stock to employees as part of their pay. And while I am not sure about this, I think FFH does it with all or most employees, not just senior managers. BRK's method works with people earning millions but I am not sure expecting/forcing relatively lower-paid employees to buy stock out of their salary is workable - in this instance, I think the FFH system is actively better.

 

13 hours ago, Munger_Disciple said:

If the SBC at FFH is just matching 10% of employee comp with stock, and they are buying back stock in the market to satisfy the SBC, I am ok with it especially if it has a long enough vesting period. I would like to see the details of the plan though. 

I believe at least some details are disclosed in subsidiary filings - most of the employees are at the subsidiaries after all, not the holdco. I have definitely seen details for one of the subsidiaries before, I think maybe Allied. Management also mentioned 15y vesting periods on the 1q18 call and have mentioned tying performance-based comp to 15% book value growth in meetings.

 

13 hours ago, Munger_Disciple said:

it pays to be skeptical rather than assume everything is wonderful IMO

 

Yes, but it's not as simple as saying: SBC is too large. We need to know how big it is compared to base pay, how it vests, whether there's anything unusual about the current period (e.g. a period of excellent BV and stock price performance might be driving additional vesting), etc.

[petec]

12 hours ago, SafetyinNumbers said:

I think it’s arguable Fairfax has a better culture and the SBC might be a big part of that.

 

Yes.

[petec]

BTW something that I don't think has been mentioned: in the last year they've sold $1.85bn of 2054 and 2055 debt at an average rate just under 6%. I am inclined to view that as an asset, not a liability! 

 

It also just astonishes me how "on the front foot" they are compared to a few years ago. Consider the cash laid out just recently for Sleep Country, Vacatia, Brit, Peak, and buybacks. Great to see.